- Types of Equity
- Equity Formula
- Examples of Equity
Equity means the ownership interest or ownership value that shareholders have in a company. It represents the residual interest in a company's assets after all of its liabilities have been paid off. It is also known as shareholders funds or owners equity.
Equity is often measured as the value of a company's assets minus its liabilities, and it's a key component in determining a company's net worth. It is a fundamental concept in understanding how ownership, financing, and value distribution work within a business. The equity section of the balance sheet includes items such as common and preferred shares, retained earnings (profits not distributed as dividends), and additional paid-up capital.
Types of Equity
Common equity, also known as common stock, represents the most basic form of ownership in a company. Common equity shareholders have voting rights and are entitled to a share of the company's profits through dividends. They also bear the highest level of risk and reward. In case of liquidation, common equity holders are paid after all debts and preferred shareholders' claims have been satisfied.
Preferred equity holders have a higher claim on the company's assets and earnings than common equity holders. Preferred shareholders usually receive fixed dividends, which are paid before dividends are distributed to common shareholders. However, they typically do not have voting rights or the potential for as much capital appreciation as common shareholders.
Retained earnings are a type of equity that arises from a company's accumulated profits that have not been distributed to shareholders as dividends. Instead, these earnings are reinvested in the business for growth, expansion, research, or other purposes. Retained earnings contribute to the company's overall equity base.
Treasury stock refers to shares of a company's own stock that it has repurchased from the market. These shares are not considered outstanding and do not carry voting rights or receive dividends. Treasury stock can be reissued or retired, affecting the company's equity
Determining the value of a company's equity is a fundamental task in finance. Here are some of the key formulae for calculating equity:
Equity as the Residual Value:
Equity = Total Assets - Total Liabilities
Equity in a Corporation (Shareholder's Equity):
Shareholder's Equity = Common Stock + Preferred Stock + Retained Earnings + Additional Paid-in Capital + Other Comprehensive Income + Treasury Stock + Non-controlling Interest
Equity Per Share:
Equity Per Share = Shareholder's Equity / Total Outstanding Shares
Return on Equity (ROE):
ROE = Net Income / Average Shareholder's Equity
Examples of Equity in Finance
Let us take the example of Tata Motors Limited. As per their annual report and Form MGT - 7, in the year FY 2022 -2023, the company has
- Equity Capital of Rs. 45,322 crore
- Preference shares of 3,000 crores (Authorised but not issued)
These values show how much the company is worth in terms of equity. For investors, this represents an opportunity to share in the success and growth of a company. For the company itself, equity financing is a way to fund its operations, projects, and expansion plans without taking on debt.